When in test game enter the metrics panels (tab tab) and in the bottom left, there is a slider called water and reflections. Move the slider to the right till you achieve the level of reflection you would like.
I made a pit in the terrain on the largest brush and lowered the terrain for a good 30 seconds, and could not get it to throw me an error.
Could you list your machine specs and Operating system.
Thanks
Intel(R) Core(TM)2 Quad CPU Q6600 @ 2.40GHz, 2400 Mhz, 4 Core(s), 4 Logical Processor(s), 8gb RAM, Nvidia gtx660, Windows 7 Pro 64bit